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11. Public Goods and Common Resources. M icroeonomics. P R I N C I P L E S O F. N. Gregory Mankiw. Premium PowerPoint Slides by Ron Cronovich. In this chapter, look for the answers to these questions:. What are public goods? What are common resources? Give examples of each.

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Public Goods and Common Resources

Microeonomics

P R I N C I P L E S O F

N. Gregory Mankiw

Premium PowerPoint Slides by Ron Cronovich

in this chapter look for the answers to these questions
In this chapter, look for the answers to these questions:
  • What are public goods? What are common resources? Give examples of each.
  • Why do markets generally fail to provide the efficient amounts of these goods?
  • How might the government improve market outcomes in the case of public goods or common resources?

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introduction
Introduction

We consume many goods without paying: parks, national defense, clean air & water.

When goods have no prices, the market forces that normally allocate resources are absent.

The private market may fail to provide the socially efficient quantity of such goods.

One of the Ten Principles from Chapter 1: Governments can sometimes improve market outcomes.

PUBLIC GOODS AND COMMON RESOURCES

important characteristics of goods
Important Characteristics of Goods

A good is excludable if a person can be prevented from using it.

Excludable: fish tacos, wireless internet access

Not excludable: FM radio signals, national defense

A good is rival in consumption if one person’s use of it diminishes others’ use.

Rival: fish tacos

Not rival: An MP3 file of Kanye West’s latest single

PUBLIC GOODS AND COMMON RESOURCES

the different kinds of goods
The Different Kinds of Goods

Private goods: excludable, rival in consumption

Example: food

Public goods: not excludable, not rival

Example: national defense

Common resources: rival but not excludable

Example: fish in the ocean

Natural monopolies: excludable but not rival

Example: cable TV

PUBLIC GOODS AND COMMON RESOURCES

a c t i v e l e a r n i n g 1 categorizing roads
A C T I V E L E A R N I N G 1Categorizing roads
  • A road is which of the four kinds of goods?
  • Hint: The answer depends on whether the road is congested or not, and whether it’s a toll road or not. Consider the different cases.

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a c t i v e l e a r n i n g 1 answers
A C T I V E L E A R N I N G 1Answers
  • Rival in consumption? Only if congested.
  • Excludable? Only if a toll road.

Four possibilities:

Uncongested non-toll road: public good

Uncongested toll road: natural monopoly

Congested non-toll road: common resource

Congested toll road: private good

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the different kinds of goods1
The Different Kinds of Goods

This chapter focuses on public goods and common resources.

For both, externalities arise because something of value has no price attached to it.

So, private decisions about consumption and production can lead to an inefficient outcome.

Public policy can potentially raise economic well-being.

PUBLIC GOODS AND COMMON RESOURCES

public goods
Public Goods

Public goods are difficult for private markets to provide because of the free-rider problem.

Free rider: a person who receives the benefit of a good but avoids paying for it

If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good.

Result: The good is not produced, even if buyers collectively value the good higher than the cost of providing it.

PUBLIC GOODS AND COMMON RESOURCES

public goods1
Public Goods

If the benefit of a public good exceeds the cost of providing it, govt should provide the good and pay for it with a tax on people who benefit.

Problem: Measuring the benefit is usually difficult.

Cost-benefit analysis: a study that compares the costs and benefits of providing a public good

Cost-benefit analyses are imprecise, so the efficient provision of public goods is more difficult than that of private goods.

PUBLIC GOODS AND COMMON RESOURCES

some important public goods
Some Important Public Goods

National defense

Knowledge created through basic research

Fighting poverty

PUBLIC GOODS AND COMMON RESOURCES

common resources
Common Resources

Like public goods, common resources are not excludable.

Cannot prevent free riders from using

Little incentive for firms to provide

Role for govt: seeing that they are provided

Additional problem with common resources:rival in consumption

Each person’s use reduces others’ ability to use

Role for govt: ensuring they are not overused

PUBLIC GOODS AND COMMON RESOURCES

the tragedy of the commons
The Tragedy of the Commons

A parable that illustrates why common resources get used more than is socially desirable.

Setting: a medieval town where sheep graze on common land.

As the population grows, the # of sheep grows.

The amount of land is fixed, the grass begins to disappear from overgrazing.

The private incentives (using the land for free) outweigh the social incentives (using it carefully).

Result: People can no longer raise sheep.

PUBLIC GOODS AND COMMON RESOURCES

the tragedy of the commons1
The Tragedy of the Commons

The tragedy is due to an externality: Allowing one’s flock to graze on the common land reduces its quality for other families.

People neglect this external cost, resulting in overuse of the land.

PUBLIC GOODS AND COMMON RESOURCES

a c t i v e l e a r n i n g 2 policy options for common resources
A C T I V E L E A R N I N G 2Policy options for common resources
  • What could the townspeople (or their government) have done to prevent the tragedy?
  • Try to think of two or three options.

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a c t i v e l e a r n i n g 2 answers
A C T I V E L E A R N I N G 2Answers
  • Impose a corrective tax on the use of the land to “internalize the externality.”
  • Regulate use of the land (the “command-and-control” approach).
  • Auction off permits allowing use of the land.
  • Divide the land, sell lots to individual families; each family will have incentive not to overgraze its own land.

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policy options to prevent overconsumption of common resources
Policy Options to Prevent Overconsumption of Common Resources

Regulate use of the resource

Impose a corrective tax to internalize the externality

example: hunting & fishing licenses, entrance fees for congested national parks

Auction off permits allowing use of the resource

example: spectrum auctions by the U.S. Federal Communications Commission

If the resource is land, convert to a private good by dividing and selling parcels to individuals

PUBLIC GOODS AND COMMON RESOURCES

some important common resources
Some Important Common Resources

Clean air and water

Congested roads

Fish, whales, and other wildlife

PUBLIC GOODS AND COMMON RESOURCES

case study you ve got spam
CASE STUDY: “You’ve Got Spam!”

Some firms use spam emailsto advertise their products.

Spam is not excludable: Firms cannot be prevented from spamming.

Spam is rival: As more companies use spam, it becomes less effective.

Thus, spam is a common resource.

Like most common resources, spam is overused – which is why we get so much of it!

“Spam” email is named after everyone’s favorite delicacy.

PUBLIC GOODS AND COMMON RESOURCES

conclusion
CONCLUSION

Public goods tend to be under-provided, while common resources tend to be over-consumed.

These problems arise because property rights are not well-established:

Nobody owns the air, so no one can charge polluters. Result: too much pollution.

Nobody can charge people who benefit from national defense. Result: too little defense.

The govt can potentially solve these problems with appropriate policies.

PUBLIC GOODS AND COMMON RESOURCES

chapter summary
CHAPTER SUMMARY
  • A good is excludable if someone can be prevented from using it. A good is rival in consumption if one person’s use reduces others’ ability to use the same unit of the good.
  • Markets work best for private goods, which are excludable and rival in consumption. Markets do not work well for other types of goods.

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chapter summary1
CHAPTER SUMMARY
  • Public goods, such as national defense and fundamental knowledge, are neither excludable nor rival in consumption.
  • Because people do not have to pay to use them, they have an incentive to free ride, and firms have no incentive to provide them.
  • Therefore, the government provides public goods, using cost-benefit analysis to determine how much to provide.

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chapter summary2
CHAPTER SUMMARY
  • Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested roads.
  • People can use common resources without paying, so they tend to overuse them. Therefore, governments try to limit the use of common resources.

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